Ferrous Metals

Price volatility hit metals markets hard last week and now some are calling for new rules to regulate the London Metal Exchange. In India, South Korean steelmaker POSCO may pull out of a planned plant because of a new law that would increase the price of its raw material, iron ore.

New LME Rules?

The LME may have to introduce new rules to rein in extreme price volatility to conform with other exchanges and regulatory regimes, industry sources told Reuters.

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Prices of industrial metals have fallen fast in recent months on worries about demand growth in top consumer China, with concerns reinforced last week as China’s stock market plunge pulled copper down to a six-year low of $5,240 a metric ton.

POSCO May Scrap India Steel Project

South Korean steelmaker POSCO might scrap plans for a $12 billion project it agreed to set up in India a decade ago, after a new law made it costlier to source iron ore for the plant, a company spokesman told Reuters. The US-listed shares of POSCO fell as much as 3.3% to their lowest in more than six and a half years after the report.

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jeff yoders chicago cubs 1060 project

Ahoy from the corner of Waveland and Sheffield.

After covering ‘Steel Dumping 101′ in Part 1 and how the grain-oriented electrical steel market is different in Part 2 of our inaugural podcast episode, we turn to a more random endeavor – checking out the Chicago Cubs’ 1060 Project at Wrigley Field to get our structural steel fix.

With Pepper Construction as the general contractor on the project, Jeff and I wanted to get some eyes on the latest phase of development. So how many tons of structural steel are likely involved here? What are some of the sourcing considerations for an undertaking such as the 1060 Project? And most important, what do the fans have to say about steel sourcing? Listen below!

Music: “All Those Devils…” by Holy Pain (http://www.myspace.com/holypain)

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A quiet revolution is going on in the US power generation market, and it may be giving a lesson for those countries dithering over whether to allow hydraulic fracturing (fracking) of oil and natural gas deposits identified but not yet proven.

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According to the FT, April was the first month in US history that gas-fired electricity generation surpassed coal-fired generation, (although it came close in 2012 when gas prices were also very weak). By comparison, in 2010 coal provided 45% of US power. In April of this year 31% of US electricity was generated by natural gas compared to 30% for coal, and the trend continues.

Watts Up

In gigawatt terms, wind power is growing even faster than natural gas, flattening the latter in the league tables. US coal capacity dropped by about 3.3 GW during 2014, and the US Energy Information Association predicts it will shrink by a further 12.9 GW this year, while wind power capacity rose by 9.8 GW and gas by 4.3 GW.

Source FT

Source: Financial Times

The reasons are more complex than simply low natural gas prices, although that, undoubtedly, is a major factor. The Environmental Protection Agency’s failed attempt to force environmental compliance by the back door this year encouraged some coal-fired utilities to see the writing on the wall and either mothball plants or invest in new technology to accommodate the mercury emission and other pollution targets, raising costs.

Brett Blankenship of Wood Mackenzie is quoted by the FT as saying, “low gas prices mean coal plants are running less, and when they run their margins are typically compressed. So companies find it difficult to make the investments needed to comply with regulations and keep those plants running.”

The Imitation/Substitution Game

It’s a vicious downward spiral in the face of lower-priced and less-polluting competitor fuels. Although natural gas makes a better swing fuel source to balance wind and solar renewables variability, not all utilities are blessed with an abundance of such spare generating capacity so they rely on their coal power plants to step in at times of peak demand. Unfortunately, running a coal plant at anything other than full or near-full load on a continuous basis brings per-gigawatt operating costs up AND per-gigawatt emissions of pollutants.

Not surprisingly, coal producers share prices have fared even worse than shale gas companies. Peabody Energy’s share price, the largest US coal producer, has fallen 98% since April 2011, while those of Arch Coal have dropped 99.2% and of Alpha Natural Resources by 99.6%, while their debt is so devalued it is yielding 17.9% for Peabody suggesting investors are expecting default.

With natural gas prices set to stay low for some years to come and renewable costs falling steadily the writing is on the wall for all but the latest and most efficient coal-powered electricity production. At least the environmental lobby will be pleased and the EPA may have achieved much of what it set out to do, Supreme Court slap down or not.

This September: SMU Steel Summit 2015

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MM-IndX_TRENDS_Chart_July-2015_FNL

There’s no reprieve from the bearish metals environment in this month’s MMI Report.

More Analysis: The July Metal Price Forecast

With the exception of the very specialized grain-oriented electrical steel (GOES) market and the Renewables MMI®, all of our indexes lost ground in June and could not gain traction amid falling commodity prices and a strong US dollar.

The one index that was steady from last month, which tracks raw material inputs of the renewable energy sector, has been stagnant for two years and, until trends show otherwise, its steadiness is more a measure of a lack of market activity than anything close to a turnaround or a new trend toward increasing prices.

The Stainless MMI is flirting with two-year lows and our Raw Steels index is up against lows not seen in years as well. Weakness in the Chinese stock market has put additional pressure on metals that were already reeling from the effect of the strong dollar. This is bad news for steelmakers, miners, refiners and smelters by itself, but coupled with increased supply in most of the metals we track, it’s become a real deterrent to profitability.

Moreover, both Europe and the US have higher-than-normal inventories of semi-finished products at service centers. Mill lead times remain short suggesting weak demand. Weak demand will continue to place downward pressure on prices.















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July 2015 Monthly Metal Buying Outlook copy

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How is the Grain-Oriented Electrical Steel Market Different?

Screen Shot 2015-07-09 at 3.25.29 PMIn Part One of this inaugural episode, we ran down the super-basics of what steel dumping is all about…which got us wondering about all the recent anti-dumping hullabaloo surrounding GOES (grain-oriented electrical steel). Luckily, our in-house expert on the GOES market, esteemed executive editor and our first guest Lisa Reisman was on hand to edify us all. Listen below!

Music: “All Those Devils…” by Holy Pain (http://www.myspace.com/holypain)

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Chinese steel output slowing and Mexico is imposing tariffs on steel tube imports from the US and others.

Steel Production Slowing in China

China’s crude steel output dropped 0.8% in June from a year earlier, government data showed on Wednesday, with demand hit by crawling economic growth there and a property sales slowdown in the world’s top producer.

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Average daily output reached 2.298 million metric tons last month, the highest since June last year, according to data from China’s National Bureau of Statistics.

Mexico Places Tariffs on Steel Tubes

Mexico imposed provisional import duties on carbon steel tubing with seams from the US, Spain and India, on Tuesday as it investigates possible dumping. The new measures, announced by the economy ministry, come as Mexico steps up efforts to protect its struggling steel industry.

This September: SMU Steel Summit 2015

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Our very first episode of our very first podcast! We’re on DumpWatch for steel dumping: Listen below – and crank up the volume to 11!

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Among the top three aerospace engine manufacturers in the world, ahead of Pratt & Witney but behind General Electric, Rolls Royce is the only viable major alternative to American dominance in the space.

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Aircraft builders such as Boeing and Airbus, not to mention a number of smaller firms specify one of the three for all their large aircraft and many smaller models. The aircraft industry has been on a roll for years, driven by rapidly expanding global trade in Asia and the Middle East and high oil prices causing considerable pain for airlines in fuel costs.

Trent 7000 infographic.indd

Rolls Royce is counting on sales of engines such as the Trent 7000 to move its business from maintenance-focused to new sales-focused. Infographic: Rolls Royce

Aircraft makers have enjoyed bumper order books stretching out into the next decade. As a result, one would think all is well with the engine manufacturers. Every plane needs engines, right?

Production vs. Maintenance

Well, yes and no. Yes they all need engines and firms like Rolls make as much from service and maintenance as they do from selling new engines. Even more, probably. Yet timing is everything even in this business and Rolls has hit turbulence that has resulted in a fall in its share price and a third profit warning in 18 months.

Although Rolls is still predominantly an aircraft engine maker, the company makes about 70% of revenue and profit from the civilian and defense aerospace market, it also makes marine engines for supply vessels and power systems for oil rigs – a market that has tanked since the oil price collapsed and capital expenditures have been slashed.

Rolls’ main woes, though, have come from the aerospace side. According to the London Telegraph, the civil aviation industry is moving from fleets of smaller planes with less efficient engines (servicing and maintenance of which is highly cash-generative business for Rolls) to a new generation of larger planes with more efficient engines.

It has been estimated by analysts that cash and profits from engine contracts on the 747, 757 and 777 generation of jets will fall during the next two years. At the same time, the Telegraph says, the transition to new cash-flows from the delivery of the Trent 700 engine on the A330 are now lower than expected, as customers wait for the improved Trent 7000 engine to be fitted to the more fuel efficient A330neo, still a year or two away from production.

Counting on New Orders

The company is also waiting for a ramp-up of the Trent XWB engines for the new A380 and A350 programs, both of which are behind schedule.

Rolls isn’t going to go bust by any means, but the firm’s cancellation of its share buyback program and its third profit warning has supported calls for the marine and aerospace sectors to be split. Or for the marine business to be sold off with some suggesting that would see up to a 20% increase in its share price in the event of a split or raise up to $6 billion if marine was sold, which short-term investors are hoping could be returned to shareholders.

A Common Aviation Problem

Rolls’ problems probably mirror the rest of the engine makers. A full order book is not, in itself, a guarantee of consistently strong returns. Projects wax and wain, and if external pressures such as oil prices hasten the end of one contract before the next is ready to take off, suppliers suffer.

There will likely be something of a knock-on effect for material suppliers. Tier ones, of course, usually have good visibility into their principals’ programs. Those further down the food chain are sometimes not so lucky.

Free Download: Last Chance for the June MMI Report

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Niche markets like grain-oriented electrical steel (GOES) tend to develop their own set of pricing trends.

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In some respects, GOES appears more volatile than most of the other metals we track. In some cases prices bump up $350 per metric ton in a month and in others they fall nearly $200/mt. MetalMiner's monthly M3 index moved up significantly with a 15.2% jump:

GOES_Chart_July_2015_FNL

In the case of the domestic market, we essentially have an oligopoly controlled by a small handful of players who [sort of] set the domestic price.

We say sort of because the customer base for GOES is highly concentrated. In many cases the buying power does indeed rest with the buyer. Despite the volatility, GOES also remains in a bearish trend as well.

Did the Anti-Dumping Case Change Anything?

Last fall, we released a compilation report of multiple GOES stories we ran, covering primarily the US domestic producer anti-dumping filing. For those in the industry who have followed developments closely, the story ended before the Department of Commerce ultimately ruled against the domestic producers.

We say the story ended because large electrical power equipment manufacturers moved their supply chains to alternative locations, primarily Canada and Mexico in anticipation of an unfavorable anti-dumping ruling that would have added duties to the cost of imports.

However, the duties never came, but the proverbial procurement “Plan B” went into effect all the same.

Lamentations About Laminations

In January of this year, the International Trade Commission created several new HTS codes to track product movement for laminations for incorporation to stacked cores (HTS code: 8504.90.9534) and transformer parts (HTS Code: 8504.90.9546).

Imports of transformer parts continue to ratchet up as the latest trade data from Zepol shows:

[caption id="attachment_71337" align="alignnone" width="551"]Source: Zepol Source: Zepol[/caption]

Notably, Japan has taken the second-place spot in terms of dollar value of imports. We can only surmise that some domestic buyers require the more demanding GOES materials only produced by the Japanese, and the Japanese may be more comfortable shipping a semi-finished product to the US market vs. actual grain-oriented electrical steel.

Imports for laminations for stacked cores remain small in comparison.

The Actual GOES M3 Price

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